dubois gadde 2000

*Corresponding author. Tel.: #46-31-772-11-96.E-mail addresses: [email protected] (A. Dubois), laga@mot.

chalmers.se (L.-E. Gadde).

European Journal of Purchasing & Supply Management 6 (2000) 207}215

Supply strategy and network e!ects * purchasing behaviourin the construction industry

Anna Dubois*, Lars-Erik GaddeChalmers University of Technology, Department of Industrial Marketing, S-412 96 Gothenburg, Sweden

Accepted 6 April 2000

Abstract

Partnering with suppliers and networking are increasingly used as means to improve company performance. This paper exploresthe occurrence of network e!ects in the construction industry. Bene"ts from network e!ects arise when "rms adapt to one another interms of technical solutions, logistics or administrative routines. The study "nds such e!ects to be unusual in the constructionindustry. The main reasons for the absence of adaptation are found to be the current focus on the e$ciency of individual projects andthe competitive tendering procedures used. It is concluded that these characteristics are having a hampering e!ect on both e$ciencyand innovation in the industry today. ( 2000 Elsevier Science Ltd. All rights reserved.

Keywords: Network e!ects; Construction e$ciency; Purchasing behaviour

1. Introduction

The supply side is of increasing strategic importance inmost companies today. This change re#ects a new aware-ness of the bene"ts to be gained from better utilisingresources from beyond the boundaries of "rms. The ad-vantages of partnering with suppliers have been parti-cularly emphasised (see e.g. Carlisle and Parker, 1989).Reaping partnering bene"ts requires a shift in atmo-sphere and behaviour from traditional arm's length rela-tionships. For example, short-term focus on e$ciency inthe individual transaction needs to be replaced withlonger-term-oriented relational exchanges based on closebuyer}seller relationships. The bene"ts of these constella-tions are obtained partly from better use of individualsuppliers, partly from network e!ects derived out of thecombined e!orts of a number of suppliers (Hakanssonand Snehota, 1995).

The construction industry is heavily dependent onsubcontractors and suppliers of building materials. Onefeature of this industry is `the practice of subcontractingportions of a project to special trade contractors byprimary contractorsa (Eccles, 1981a). For example, in

Swedish construction the level of subcontracting hasincreased substantially over time. The three majorSwedish primary contractors are good illustrations ofwhat has been identi"ed as `quasi-"rmsa (Eccles, 1981b),a trend that has increased substantially in recent years.Purchased materials and services account for about 75%of total costs in these "rms. This makes constructionahead of most other industries in terms of outsourcing.However, in other industries increasing specialisationhave made buying "rms able to improve e$ciency ande!ectiveness by changing the nature of relationships withsuppliers. The aim of this paper is to explore how "rmswithin the construction industry take advantage of theiropportunities to make use of external resources throughco-operation.

2. Supply strategy and network e4ects

Studies of customer}supplier collaboration haveshown that major bene"ts may be achieved when "rmsmake adaptations to one another (Hines, 1994; Spekmanet al., 1999). Three main types of adaptation may bedistinguished (Gadde and Ha> kansson, 1994). First, tech-nical adaptations connect the production operations ofsupplier and customer. These adaptations have to dowith the technical content of the products exchanged.

0969-7012/00/$ - see front matter ( 2000 Elsevier Science Ltd. All rights reserved.PII: S 0 9 6 9 - 7 0 1 2 ( 0 0 ) 0 0 0 1 6 - 2

A customer may "nd it appropriate to ask a supplier todevelop a product that will be a perfect "t for the needs ofthe buying "rm, either in terms of technical content orphysical features. Another form of technical adaptation isrelated to the material #ow between supplier and cus-tomer. Sophisticated logistics systems, such as just-in-time delivery, may enhance e$ciency of operations. Thesecond type of adaptation is in administrative routines.Business transactions are characterised by a great deal ofinformation exchange, regarding inquiries, tenders, or-ders, delivery noti"cations, invoices, etc. Adaptations interms of integrated information systems are intended toimprove the e$ciency of administrative operations andbureaucracy. The third main type of adaptation is know-ledge-based. In close, long-term, relationships customerand supplier develop considerable knowledge about oneanother's operations. In well-developed partnerships,skills on both sides tend to be connected and not easilyseparable. These mutual adaptations tend to bring the"rms together and have a particular signi"cance for jointe!orts in technical development.

Hakansson and Snehota (1995) present a frameworkfor analysing the characteristics and consequences ofadaptations in buyer}seller relationships. The most im-portant dimension of a relationship is its substance. Thesubstance stems from the adaptations undertaken. Thereare three di!erent kinds of substance that connect theparties in a relationship. The "rst has to do with thelinking of the activities of the "rms. Activity links connectthe production, logistics and administrative operations ofthe companies. The best known examples of the bene"tsof activity linking concern the integrated supply-chainsin the automotive industry (Lamming, 1993; Hines,1994). The second substance type relates to the resourceties between the companies. The relationship ties theresource elements on both sides. These resources may bephysical facilities, such as machines and equipment, orhuman knowledge. Resource ties create substance thatpromotes joint technical development. Bene"ts of sup-plier involvement in product development have appearedin many industries (see, for example, Wynstra, 1998). Thethird type of substance is created through interactionbetween people. Actor bonds are important determinantsof trust and commitment, which are, in turn, prerequi-sites for investments in activity links and resource ties.

The substance of a relationship also has an economicaspect. Adaptations are investments that can be used forimproving e$ciency in day-to-day operations, as well asfor promoting development. Long-term relationshipsmake successive re"nement of activities possible. Adapta-tions thus contribute to enhanced performance. Theseadaptation e!ects make close customer-supplier relation-ships important in themselves. Furthermore, they pro-vide links to other relationships, which can, in turn,produce even greater bene"ts. Therefore it is relevant toconsider industrial systems as networks of connected

relationships (Cook and Emerson, 1978). To an increas-ing extent, buying companies encourage collaborationnot only with suppliers but also among them. The notionof supply networks is very much in vogue today. Long-term interaction with a network of suppliers should makeit possible for a customer to stimulate mutual adapta-tions and thus network e!ects bene"cial to the perfor-mance of the whole system. Eccles (1981b) observed thatprimary contractor}subcontractor relationships in theUS construction industry are fairly stable over time.These relationships are described as `recurrent series oftransactions with a small number of subcontractorsa(Eccles, p. 351). In other industries these conditions havebeen the breeding ground of network e!ects.

The "rst research issue is concerned with the kind ofrelationships there are between primary contractors andtheir suppliers. The second deals with network e!ectsachieved through adaptations in the supply network ofa primary contractor. Researching these issues shouldprovide fundamental insights about e$ciency and e!ec-tiveness in the construction industry and increase ourgeneral knowledge about which network e!ects can beattained by applying speci"c supply strategies. As ex-plained by Cox and Thompson (1997), most academicwork in these areas has been concerned with `widgetaproduction within controlled factory environments`where the supply of goods is merely a repeat process o!a production/assembly linea (p. 128). Construction workhas other characteristics. Therefore, the results of thestudy add to our knowledge of network e!ects in general.

3. Methodology and data-set

The main empirical basis of this study has been de-veloped from a major case study examining a combinednew construction and renovation project. The construc-tion site was located in central Gothenburg (Sweden),which implied some special requirements in terms oflogistics and physical distribution. For various reasonsthe project was under severe time pressure, which a!ec-ted some of the important decisions. This study can becharacterized as a retrospective case study coveringa four-year period from the "rst planning stages throughcompletion of the building. Most interviews were under-taken in the "nal stage. The "rst part of the data set is anextensive mapping of the suppliers, installation con-tractors, consultants, and other actors involved in theproject. This was carried out in co-operation with repre-sentatives of the primary contractor (mainly the projectleader and purchasing sta!). The total cost of the projectamounted to a sum corresponding to USD 10 million.All in all, the primary contractor used 14 subcontractorsand 10 material suppliers.

The second part of the empirical data consists of sub-cases where the roles of "ve main suppliers are analysed.

208 A. Dubois, L.-E. Gadde / European Journal of Purchasing & Supply Management 6 (2000) 207}215

Table 1Characteristics of the products studied in the sub-cases

Products: Degree of productadaptation

Contacts with materialproducer

Supplier activeon site

Buyer}sellerinteraction

Co-ordination withother suppliers

Frames High Direct and substantial Yes High SubstantialPlasterboards None (standardised) Direct and through

distributorNo Low Low

Insulation None (standardised) Direct and throughdistributor

No Low Low

Windows Mix of standardised andadapted products

Direct and throughdistributor

Marginal Average Low

Electrical installations High No Yes High Substantial

Grasping the complexity of the supply processes in theconstruction industry required application of deep-pro-bing methodology. The cases provide in-depth analysis ofthe supply chain for "ve selected inputs (the frame, insu-lation, plasterboards, windows and electrical installa-tion). These sub-cases were developed through interviewswith material producers, distributors, specialised con-tractors and the material producers' suppliers. The ma-terials were selected to represent variation in a number ofrespects, as illustrated in Table 1. Together the "ve sup-ply chains accounted for 25% of the total costs.

Data collection was based mainly on personal inter-views. A total of 27 interviews were made with 29 inform-ants, representing 11 companies. The interviews werefocused mainly on the particular construction project.However, the interviews also captured similarities anddissimilarities of the project in comparison with otherprojects in which the suppliers was, or had been, in-volved. This approach made it possible to discuss andevaluate di!erent ways of organising supply chains andanalyse the potential network e!ects. The interviewscontained a mixture of structured and semi-structuredquestions and responses. A detailed, standardisedquestionnaire was used to collect information concerningthe products and services exchanged as well as theadaptations undertaken among "rms. The semi-struc-tured questions aimed at revealing more qualitative andsubtle opinions concerning the connection between the"rms' purchasing behaviour on the one hand and thecorresponding network e!ects on the other.

The scope of this paper makes it impossible to presentdetailed information from the database and the cases.Instead, general "ndings from the study as a whole havebeen condensed into four di!erent themes. The "rsttheme deals with standardisation and adaptation in con-struction materials supply. The level of standardisationof activities and resources, in turn, a!ects the roles of theactors, which is the second theme. An actor in a networkcan either be specialised or broad in terms of activityscope and resource collection. The mixture of the actor

structure impacts on what kind of network substance canbe generated. The third theme relates to the conse-quences of one of the most fundamental organisationalcharacteristics in construction: a construction project isa temporary organisation. It can also be regarded asa temporary network within the larger permanent net-work of the construction industry as a whole. The tem-porary network thus activates the permanent network inone way or another in every construction project. Theway it is activated has a profound impact on the potentialnetwork e!ects. A particular aspect in this respect is thenature of the exchange processes applied. As mentioned,two main types of exchange can be distinguished* transactional and relational. The fourth theme of thediscussion concerns conditions for substance develop-ment depending on the type of exchange implemented.

4. Theme 1: Standardisation versus adaptation

The basic research issue was to analyse the occurrenceof network e!ects. These e!ects arise from the develop-ment of network substances that stem, in turn, fromadaptations in the relationships. Adaptations may en-hance e$ciency in relationship performance. On theother hand, adaptations may lead to the kind of interde-pendencies some "rms try to avoid. Furthermore, ad-aptations are always costly* they require investments ofvarious kinds. For this reason a customer has to makea choice between adapted (customised) solutions andstandardised ones.

One main "nding from the study is that supply ofbuilding materials is primarily characterised by exchangeof standardised products. In this project only a few cus-tomised solutions were used, the most obvious being theframe, which is more or less unique for every construc-tion project. However, even the frame is composed ofdi!erent combinations of standardised components. Thislow degree of customisation seems to apply to construc-tion projects in general. It is quite unusual that material

A. Dubois, L.-E. Gadde / European Journal of Purchasing & Supply Management 6 (2000) 207}215 209

producers develop products for particular constructionprojects or a speci"c primary contractor. Cox andThompson (1997) mention some examples of adaptedsolutions but consider construction to be ìnherentlya site-speci"c &project-based' activitya (Cox and Thom-pson, 1997, p. 128). The strong focus on the project andits economy entails a rather short-term perspectiveemphasising competitive bidding as the main tool insupplier evaluation.

Consequently, customer}supplier relationships in con-struction are generally of the arms-length type ratherthan being partnerships. This "nding is in accordancewith Cox and Thompson (1997) who concluded thatcompetitive tendering assures that sub-contracting is`procured to the lowest-price supplier with little or noguarantee (or even incentive) to future worka (Cox andThompson, 1997, p. 129). Making use of the price mecha-nism in this way requires that the buying "rm refrainsfrom adaptations to individual vendors and relies onstandardised solutions. At "rst glance this standardisa-tion may seem confusing since a construction project ischaracterised by a ùnique combination of input factorsrequired to complete the projecta (Eccles, 1981b, p. 338).Stinchcombe (1959) observed the strong reliance on stan-dard products in a comparison of the construction indus-try and the automobile industry. He argued that massproduction is dependent on standardised tasks while con-struction projects are characterised by utilisation of stan-dardised parts. This means that the uniqueness of theparticular building must be created at the constructionsite, resulting in situations where òperative decisions arestill very important at the work level [2] modi"cationsof tools for special purposes is done by workersa (Stin-chcombe, 1959, p. 182). In addition, Gann (1996) analysessimilarities and dissimilarities between industrial housingand car production in Japan. A major "nding is thatmanufacturing principles derived from the car industryhave been successfully used to produce customisedhomes. But, there are limits to which such techniques canbe applied to manage the assembly of wide varieties ofcomponents and parts. Managers must trade o! the needto achieve economies of scale in the production of stan-dardised factory parts with economies of scope in variousstages of assembly (Stinchcombe, 1959, p. 437).

A huge number of actors are involved in the modi"ca-tions and adjustments at the construction site. Shirazi etal. (1996) found the main characteristic of constructionorganisation to be the co-ordination of specialised anddi!erentiated tasks at the site level (p. 209). Therefore, theinteraction between the actors tends to be quite intense.Their joint e!orts are mainly focused on developingsolutions to problems in the particular project. Wheredevelopment of resources and activities for purposesother than the speci"c project is concerned, however, theinteraction is apparently limited. This "nding is in ac-cordance with Hellgren and Stjernberg (1994), who found

that àctivities are orientated towards responding toproblems usually in ways that could be described asseeking the simplest and most straightforward solutiona(Hellgren and Stjernberg, 1994, p. 167). Modi"cations atthe site can be onerous and costly, in many cases so costlythat the savings gained from competitive tendering aremore than outweighed by cost increases at the construc-tion site. Love et al. (1999) have analysed the occurrenceand consequences of reworking in construction.

The lack of attention to quality by the design consul-tants was costly in time and money to all parties in thesupply chain. For example the site management typi-cally spent up to 30}35 hours a week for the "rst 10weeks of the project checking the architectural andstructural drawings to ensure that dimensions etc, co-incided with one another. When errors were found thedesigners had to typically re-design and re-schedulethe necessary elements.

(Love et al., 1999, p. 8)

The conclusion of this discussion is that the resourceties between the resource collections of speci"c "rms tendto be weak in the design phase of a project since adaptedsolutions are seldom developed. A similar pattern hasbeen identi"ed regarding activities and their inter-link-age. Most activities are integrated through fairly standar-dised links, which also seem to have been established asnorms and common routines for the entire industry.

The low level of customisation, however, does notimply that manufacturers of materials have avoided ad-aptations to customer requirements. On the contrary,very few other industries are so entirely devoted to a spe-ci"c, homogeneous group of customers. In comparisonwith industries such as the steel and wood industries(characterised by substantial end-user heterogeneity) thedi!erence is clear. Standardised products and systemshave been developed over time, partly through interac-tion among the actors in the construction industry, partlyas a result of norms and rules lain down by governmentauthorities. In this way the construction industry is char-acterised by certain &collective' adaptations. Thus, there isgreat similarity between the product o!erings of di!erentsuppliers, both in terms of product features and in termsof price and other commercial conditions.

The general pattern is thus that activities in productionand distribution are standardised rather than cus-tomised, but in parallel to this pattern a slowly increasingtrend towards customisation can also be observed. Ac-cording to Cox and Thompson (1997) there is growinginterest among actors in the UK construction industry indeveloping collaborative relationships. They state thatpartnering has gained popularity. Similar observationsare reported by Baden-Helland (1995), Bennet and Jayes(1995), Cox (1996) and DoreH e (1997). So far these e!ortshave not been very successful, although `the search for


more collaborative contractual relations has becomea contemporary theme in the construction industrya(Cox and Thompson, 1997, p. 129). Similar tendencieswere observed in this study. Both the plasterboardcase and the insulation case provide insights intothe bene"ts that can be reaped from using customisedmaterials. In both these cases di!erent kinds of prefabri-cated solutions have been developed. They illustrate that,in some situations, performance is enhanced when activ-ities are moved from the site backward in the supplychain.

Adaptations in the construction industry are typicallycollective and project speci"c rather than relationshipspeci"c. A particular feature of these collective adapta-tions is strong reliance on contracts. However, accordingto Thompson et al. (1998), most standard forms of con-tracts actively encourage non-collaborative behaviour.Rather than being a mechanism to unite buyer and seller`the contract was being used as a wedge to drive distancebetween thema (Thompson et al. p. 36). Contracts thusimpact on the degree of standardisation as well as on therole of the actors.

5. Theme 2: Specialisation and role of actors

According to Eccles (1981a, p. 449) two prominentcharacteristics of the construction industry can be identi-"ed. The "rst is `the organisation of the production workforce into a variety of tradesa. The second is `the practiceof subcontracting portions of a project to special tradecontractors by primary contractorsa. These characteristicsare related, and Eccles shows that specialisation of indus-try is an important determinant of subcontracting. Asmentioned above the construction industry is, in general,characterised by a substantial degree of specialisation.

In terms of the role of the actors, however, the situ-ation is somewhat di!erent. The division of labouramong the actors varies greatly from project to projectand the role of an individual "rm can be very di!erentdepending on the project. The cases showed that thecontractual form chosen for the project is an importantdeterminant of the organising of actors and, accordingly,of the division of labour in the design and implementa-tion activities.

Clients may choose to subcontract activities such aspurchasing of installations and materials to a primarycontractor. Sometimes, however, clients prefer to take onthese activities within their own regime. In doing so, theymay outsource the co-ordination of the activities on siteeither to an installation contractor or a material supplier(in this study the frame producer was an example). Pri-mary contractors are also faced with a number of di!er-ent roles. They may use their own workforce on the site,or they may subcontract the activities to various tradespecialists (bricklayers, plumbers, etc.).

Installation contractors sometimes only install, butthey may also be responsible for designing the systems tobe installed. The design work may then be undertaken bytheir own personnel or purchased from consultants.Moreover, there is some overlap between di!erenttypes of installation contractors. Some of the activities onsite a!ect the systems of several installation contractors(e.g. joint solutions for cables, tubes and pipes). There-fore, one installation contractor might take on activitiesthat are undertaken by another contractor in other cir-cumstances. Consultants may be assigned by variousactors, e.g. clients, primary contractors or installationcontractors. Depending on which assignment they areengaged in the purpose and direction of their activitiesmay change.

Manufacturers of materials often supply standardisedcomponents only (as in this case). Through prefabrica-tion they may also take on or replace activities that areotherwise undertaken on site. Manufacturers are alsoinvolved in physical deliveries * a service normallyhandled by distributors. Sometimes the materialsproducers' personnel are engaged in assembling activitieson site, for instance when speci"c skills are required.Finally, distributors are involved in other activities thanphysical distribution. Sometimes they are responsible formaterials supply at the construction site. Distributors arealso active in certain forms of pre-fabrication and cus-tomisation, such as cutting of materials into speci"clengths.

The main conclusion from this discussion is that theroles of the di!erent actors are characterised by substan-tial variation. This also means that their roles are some-what di!use. The activity scope of an individual actortends to be broad, including design, production anddistribution in various combinations, which may alsovary between di!erent projects. In fact, Hellgren andStjernberg (1994) have observed that `many actors maybe partners with one another in some respects and com-petitors in othersa (p. 166). The industry as such is char-acterised by specialisation in di!erent sub-trades. In spiteof this, individual "rms seem to have quite a low degreeof specialisation. One important determinant is the con-tractual form that determines the roles of the contractors.This, in turn, may be the result of the extensive use oftendering procedures in the procurement process.

There are certain consequences regarding potentialnetwork e!ects owing to these characteristics. One obser-vation is that tasks in projects seem to be divided intofunctional disciplines that operate quite independently.The actors develop their own objectives, goals and valuesystems without considering the impact on others or thee!ects on project performance (Love et al., 1999, p. 1).Furthermore, the contractual form determines the rolesof the actors. However, the main role of the contract doesnot seem to be to co-ordinate the operations of thevarious actors. According to Cox and Thompson (1997)


Fig. 1. A construction project in its context.

the standard forms of contracts are `nothing more thaninstruments used by the parties to seek strict liability andattach blame to events as they occura (Cox and Thom-pson, 1997, p. 132). The authors argue that when suchcontracts are linked with the prevailing adversarial cul-ture the parties are easily led away from trust towardsself-interest.

6. Theme 3: The network within the network

The most signi"cant characteristic of the constructionindustry and the construction process is the project or-ganisation which has been described as a `temporarymultiple organisationa (Cherns and Bryant, 1983). Theorganising of actors and the contractual forms appliedhave profound e!ects on the division of labour in designand implementation, as well as on the roles of the actors.The impact of the project organisation, however, is evenmore far-reaching.

In the foregoing section it was mentioned that onee!ect of the prevailing division of labour is that two "rmsmay be both partners and competitors. Within a speci"cproject, however, the situation is very di!erent. In theproject the actors involved are partners in a larger con-text, the common objective being to erect a speci"c build-ing within a set time frame. When the project networkhas been established it seems that the requirements of theproject and the partners become even stronger than thoseemanating from the "rms. The interdependence withinthe project organisation tends to be strong, while it isquite weak among the "rms in the permanent construc-tion network.

Therefore, it may be appropriate to consider a projectas a speci"c temporary network within the permanentnetwork. In Fig. 1 "rms A, B and C are involved togetherin a construction project. They provide input in terms ofpeople, equipment and other resources (A1, B1 and C1).At the same time A, B and C are involved in otherprojects. The characteristics of the construction processas presented above then imply rather strong interdepen-dencies among the activities and resources of A1, B1and C1. None of these actors will be able to ful"l itstasks without the support of the others. Therefore,throughout the project, co-operation between A1, B1and C1 must be strong to handle the interdependencies.For the people from A involved in this project the rela-tionships with people in B and C seem to be moreimportant than those with other people in A. In fact, therelation between A1 and A2 may even to some extent becompetitive if these require the same resources at thesame time.

Two major reasons seem to explain the strong interde-pendence in the project. First, as discussed above, sub-stantial adjustments have to be undertaken on site. Inaddition, the bulk of products delivered are standardised.

Therefore, the participating actors need to interact andcompromise extensively to be able to make the necessaryadjustments. The second cause of interdependence isrelated to time. In most construction projects there aresevere time restrictions. For some projects time is clearlythe dominant restriction.

The conditions observed in this study seem to berelevant to construction projects in general. According toEccles (1981b) time is an important determinant of theunique input factor combination of individual construc-tion projects. The need for adjustments is also a!ected by`unpredictable site conditionsa, and Eccles concludesthat `on-site production exposes the production processto environmental conditionsa (Eccles, 1981b, p. 338). Theuncertainties posed by these conditions are taken asarguments for extensive use of subcontracting (Eccles,1981a, b). However, they may also be relevant in explain-ing the need for interaction and adjustments among thesubcontracting "rms.

This section on `the network within the networka hasbrought up two important issues for further discussion.The "rst is related to the fact that there are two networklayers to consider when network e$ciency is to be ana-lysed. One layer is the `permanenta network of actorsand resources. The other is the temporary network for-med around each construction project. The project net-


work activates resources in the permanent network toperform the activities required for completion of thebuilding. According to our observations the permanentnetwork is characterised mainly by standardisation interms of products and routines and, consequently, a lowdegree of interdependence among individual actors. Inthe project network, on the other hand, there is a sub-stantial degree of interdependence and a consequent needfor intense interaction among the actors. Both networklayers impact on the e$ciency of a project. The perma-nent network imposes restrictions regarding the way itcan be activated. Within these limits, however, manydi!erent alternatives are available.

A number of authors have argued that more co-ordi-nation among the "rms in the permanent network wouldenhance productivity and performance. Love andGunasekaran (1998) advocate concurrent engineering asa means for improving development processes. Agapiouet al. (1998) illustrate the bene"ts of logistics managementand conclude that these systems need to be based on`partnering-typea arrangements (p. 136). Low and Mok(1999) studied a construction project where just-in-timeprinciples were applied. The case study shows that it ispossible to apply various just-in-time techniques to im-prove productivity at the site. The main problems con-cerned the roles of suppliers and subcontractors. Theauthors conclude that it takes long time to develop a longterm and trusted relationship with a supplier `who is ableto cater from all the needs of the company, includingnumerous meetings, committees and sta! other thanthose in the purchasing departmenta (Low and Mok,1999, p. 667).

The second issue concerns the complexity of individualprojects as well as the construction industry in general.The resources of a "rm are simultaneously activated ina number of projects. Both resources and activities there-fore need be co-ordinated. Four dimensions of co-ordina-tion can be identi"ed in Fig. 1. First, individual projectsmust be co-ordinated * that is the co-ordination be-tween A1, B1 and C1. Second, each "rm has to co-ordinate its activities and resources among the di!erentprojects in which the "rm is involved (A1, A2, etc.).According to Kornelius and Warmelink (1998) a mainproblem for contractors `lies in the fact that many of itsparticipants work in several projects simultaneously, andset their own priorities regarding the use of capacityand/or materialsa (p. 201). Third, some activity and re-source co-ordination takes place on the "rm level, i.e.between A, B and C, and is thus not related to speci"cprojects. Finally, co-ordination is needed between thesesub-contractors and their suppliers, for example supplierC and supplier D. This study showed that the mostprominent co-ordination dimensions are the project leveland the "rm level. The relationship level has not attrac-ted as much interest as in other industries, but wouldmerit further exploration.

7. Theme 4: Relational exchange versustransactional exchange

One of our main "ndings is that transactional ex-change is the dominant form of business in the construc-tion industry. Thompson et al. (1998) made similarobservations and concluded that the business exchangetended to be contractual rather than relational. Further-more, Gann (1996) found that management of supplychains in traditional craft housing production are often`typi"ed by market-based, short-term interactions be-tween independent businessesa (p. 445). The underlyingreason for this is the heavy reliance on tendering proced-ures. Supplier competition in each transaction is assumedto be the most appropriate means of securing e$ciency inoperations. However, competitive tendering has othere!ects as well. The prevailing procedures guarantee thatthe actor constellations change all the time, making itdi$cult to utilise experience gained in previous projects.According to Cox and Thompson (1997) this `createsparticular cost ine$ciencies for the client as a new learn-ing curve is climbed by the supplier each timea (Cox andThompson, 1997, p. 128). It is always argued that eachconstruction project is unique. It should be observed,however, that this uniqueness develops to some extentbecause of the purchasing behaviour of primary con-tractors. According to our "ndings the focus on indi-vidual projects and competitive tendering makes eachproject far more unique than is necessary.

The supply strategy chosen thus clearly present con-tractors with certain drawbacks. In spite of this it hasa very strong foothold throughout the industry. Purchas-ing behaviour based on arm's length relationships issupposed to make it possible to take advantage of the`market forcesa. However, there is some doubt as towhether this is really the case. Most supply `marketsashow few signs of being real markets, because in manycases only a few suppliers are available. Furthermore, thenetwork as a whole is burdened with substantial costs forplaying the market. The prevalent tendering procedurerepresents considerable sunk costs owing to the hugenumber of hours spent on design, planning and calcu-lations that are never used. Some of our informantsstated that, on average, they are able to win one tenderout of 10. In one way or other the costs of the remainingnine have to be paid for. Other "rms estimated that theyspend between 4 and 7% of their turnover on tendering.In addition, market mechanisms may be appropriatewhen there are no interdependencies among the solutionsapplied, but in construction solutions from di!erent sup-pliers have to be adjusted and combined into speci"cbuildings on every occasion. Owing to this interdepen-dence, products cannot be developed and exchangedindependently.

There is a strong connection between how companiesbuy and what they can buy. In a long-term perspective it


is important to recognise that purchasing behaviour de-termines product development and innovation (Araujo etal., 1999). Strong reliance on standardised products andstandardised interfaces between "rms clearly does notfoster technical development. When standardised prod-ucts are used in a context where interdependence amongthem prevails this problem is accentuated. Therefore, it isnot surprising that the only traces of product develop-ment found in this study were related to the input side ofthe material producers. The raw materials used for two ofthe products (plasterboards and insulation) had beenchanged considerably * without any impact on thefunctionality of the products. Such changes can be under-taken without problems since the manufacturing of ma-terials is independent of the rest of the constructionprocess. As long as the standardised interfaces are nota!ected the content of the products can be changed. Onthe other hand, changes impacting on the interfaces toother products used on site would necessarily requireadaptations by other "rms and are therefore avoided.Therefore, it is most likely that current co-ordinationmechanisms hamper product development. On the otherhand they provide bene"ts in other respects. Korneliusand Warmelink (1998) discuss the general developmentof industry towards specialised "rms and `virtual cor-porationsa. Their conclusion is that industry in generalwill have no choice but to evolve co-ordination mecha-nisms `similar to those that have existed in constructionfor long timea (p. 200).

In the construction industry thus the co-ordination ofprojects is emphasised while co-ordination among "rmsis left to transactional exchange. Focusing on one singledimension of e$ciency while neglecting others may causeproblems because some aspects of relevance for totale$ciency are never considered. Torvatn (1996) discussesthe importance of system limitations in general. He ar-gues that problems tend to appear when certain systemboundaries are chosen and then used for too long time.Kreiner (1995) points out the danger of a one-dimen-sional view, stating that `the fact that projects occupyonly a bracket in time and thus have neither history orfuture, allows evolutionary processes little scope for im-proving performancea (p. 345). In a similar way Uzzi(1997) highlights the need for alternative units of analysis.His main argument is that when using the relationship asthe unit of analysis the focus is shifted from the qualitiesof the transaction to the qualities of the relationship.

Recently a number of studies have pointed out theneed for variety in supplier relationships. Spekman et al.(1999) observed that `not all suppliers are treatedequally, nor should they bea (p 114). Bensaou (1999)found that "rms balance a portfolio of di!erent types ofrelationships rather than relying on one type. In the samevein Dyer et al. (1998) advise "rms to avoid a `one-size-"ts-alla strategy for procurement, and advocate suppliersegmentation. Variety in relationships is important be-

cause customers can make use of di!erent skills andcapabilities of their suppliers, and cope di!erently withdi!erent interdependency situations. This is of particularimportance where embedded networks are concerned. Itis interesting to observe the di!erences between the pre-vailing type of exchange in the construction industry andthe sample of 22 supply chains in "ve selected industriesstudied by Spekman et al. (1999). They conclude that`true supply chain partners have abandoned their unilat-eral, win}lose perspectives and advocate an approachthat favours mutual gain, shared value and total systemcostsa (Spekman et al., 1999, p. 113). However, the mainmanagerial conclusion of the authors is that di!erentcontexts demand di!erent types of exchange. They arguethat `some supplier relationships are still best managedas an &open-market' exchangea (Spekman et al., 1999, p.114). What seem to be exceptions in other industries thustend to be the norms in the construction industry.

If the potential bene"ts of di!erent types of relation-ships were recognised by primary contractors the pre-requisites for adaptations and development of networksubstance would be considerably enhanced. E!orts toincrease involvement with suppliers should encourageco-operation among suppliers as well. In a study oflearning e!ects in a construction project it was shownthat the extent of "rm learning was highly correlated withthe existence of connections between di!erent relation-ships (Hakansson et al., 1999). However, the importanceto unlearn the old habits has also been stressed. Sham-mas-Toma et al. (1998) analysed the obstacles to imple-mentation of total quality management systems inconstruction. Their main recommendation is `to unlearnthe habits of competitive tendering, to take a holisticview of the process which is at odds with the currentsituation where a set of "xed and "nite requirements isexpected to be passed from party to party in the deliverychaina (p. 189).

8. Concluding discussion

The aim of the study was to analyse the occurrence andconsequences of network substance in the constructionindustry. For this purpose it was found appropriate tomake a distinction between two network layers * onepermanent and one temporary. The permanent networkis characterised by long-term recurrent exchange of prod-ucts and services among a limited number of "rms. How-ever, relationship adaptations in terms of activity linksand resource ties still seem to be negligible in comparisonwith other industries. The implication is that there is littlenetwork substance to bene"t from. This has also beenobserved in the UK construction industry where theconclusion of one study is that the "rms `traditionallypaid very little attention to the relational elements ofbusiness transactionsa (Thompson et al., 1998, p. 36).


In the temporary network, on the other hand, co-ordi-nation is substantial. The activities on the construction siterequire massive interaction among the actors. The adjust-ments and modi"cations undertaken provide huge oppor-tunities for joint learning. These conditions should providea breeding ground for network e!ects. This study dis-covered seeds of network substance in terms of jointlyadjusted solutions that facilitated work for several partieson the site. However, there is little bene"t gained from thisshared learning as long as relationships are con"ned to theduration of the individual project. This observation is alsoin accordance with "ndings from UK construction(Thompson et al., 1998), the main reason being that theconstellation of "rms involved in a temporary networkdoes not have joint plans beyond the project.

The conclusion of the study is that the prevailingfocus on transactional exchange hampers the develop-ment of network substance both in the permanent andthe temporary network. Increasing reliance on relationalexchange would enhance conditions for adaptationsamong "rms in the permanent network. Customisedproducts and services could improve both e$ciencyand innovation for all actor categories. Firstly, adaptedsolutions would reduce the need for adjustments thusincreasing e$ciency of site operations. Secondly,customised solutions would stimulate development ofdi!erentiated o!erings. Increasing relational exchangewould impact on the temporary network as well. Thistype of involvement implies that "rms recognise jointplans beyond the individual project. If they do so, it islikely that they will "nd ways to make better use of theincipient of network e!ects that appear in the temporarynetwork.

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